The effect of inflation and real wages on productivity: new evidence from a panel of G7 countries

Abstract

This article examines the effect of inflation and real wages on productivity within a panel unit root and panel cointegration framework for the G7 countries over the period 1960 to 2004. The main contribution of the article is to provide panel long-run estimates of the effect of inflation and real wages on productivity in the G7 countries over this period. The article finds that for the panel as a whole a 1% increase in real wages generates a 0.6% increase in productivity, while the effects of inflation on productivity are statistically insignificant for most of the individual countries and for the panel as a whole.

Notes

¹Im et al. (2003) assumed that ε_it  = θ_t  + ν_it where θ_t is a time-specific common effect, which indicates the degree of dependence across countries and ν_it are i.i.d. idiosyncratic random effects. While cross-sectional demeaning will introduce dependence across the demeaned error terms, the tests will remain asymptotically valid provided that the ν_it are rendered uncorrelated.